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HUD Clarifies Tax Credits

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HUD Clarifies Tax CreditsBorrowers still need 3.5% of own funds

May 29, 2009

By staff

The U.S. Department of Housing and Urban Development has clarified how tax credits under recently passed legislation can be monetized in home purchase transactions.

HUD Secretary Shaun Donovan today told a group of directors for the National Association of Home Builders that the $8,000 first-time homebuyer tax credit created under H.R. 1, the American Recovery and Reinvestment Act of 2009, can be applied toward the purchase of properties securing loans insured by the Federal Housing Administration, a news release said.

Donovan originally announced the monetization of the tax credit earlier this month.

The recovery bill became law in February.

The tax credit is not available until the borrower files a U.S. income tax return. But with today’s action, HUD will allow FHA borrowers to obtain secondary financing up front from state Housing Finance Agencies and certain non-profits.

“Today’s action will help stabilize the nation’s housing market by stimulating home sales across the country,” the statement said.

However, the funds cannot be applied toward the 3.5 percent down payment required from the borrower. But the funds can be applied toward “their down payment in excess of 3.5 percent of appraised value or their closing costs.” Funds used for discount points can help reduce interest rates.

In addition to the borrower’s own cash investment, the 3.5 percent can be contributed by parents, employers and other governmental entities.

Donovan noted that today’s actions differ from seller-funded downpayments — which were “a vehicle for abuse.”

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